Good afternoon. My name is Julianne, I will be your conference operator today. At this time, I would like to welcome everyone to Nutanix Q4 and fiscal year 2019 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Tonya Chin, Vice President of Corporate Communications and Investor Relations, you may begin your conference.
Good afternoon, and welcome to today's conference call to discuss the results of our fourth quarter and full year of fiscal 2019. This call is also being broadcast over the web and can be accessed in the investor relations section of the Nutanix website. Joining me today are Dheeraj Pandey, Nutanix's CEO, and Duston Williams, Nutanix's CFO. After the market closed today, Nutanix issued a press release announcing the financial results for its fourth quarter and fiscal year of 2019. If you'd like a copy of the release, you can find it in the press releases section of the company's website.
We'd like to remind you that during today's call, management will make forward-looking statements within the meaning of the Safe Harbor provisions of federal securities laws regarding the company's anticipated future financial performance in various periods, including anticipated revenue, software and support revenue, hardware revenue, billing, software and support billing, hardware billing, gross margin, operating expenses, net loss, net loss per share and free cash flow. The assumptions underlying our anticipated future financial performance, our plans to provide future projections and financial guidance, our business plans, initiatives and objectives, including our plans for pipeline and demand generation expansion, our focus on growing our commercial business, potential go-to-market transitions, our continued investment in technology, including our subscription-based products, talent, and sales and marketing efforts. The expected impact of these investments and our plans to manage operating expenses if our future financial performance does not meet our expectations.
Our ability to achieve such business plans, initiatives, and objectives successfully in a timely manner, and the impact of such business plans, initiatives, and objectives on our business, competitive position, and financial performance. Demand for and customer adoption of our products and services, and our ability to retain and expand upon existing customer relationships. Our plans and timing for, and the impact of our transition to a subscription-based and recurring revenue business model, and our ability to complete the transition successfully and in a timely manner. The impact of recent leadership changes, our plans for and the timing of the release of new products, technology and services, the benefits and capabilities of our platform, competitive and industry dynamics, market size and potential market opportunities, and other financial and business-related information.
These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially and adversely from those anticipated by these statements. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future. We undertake no obligation and explicitly disclaim any obligation to update, alter, or otherwise revise these statements after this call. For a more detailed description of these risks and uncertainties, please refer to our Form 10-Q for the third quarter of fiscal 2019, filed with the SEC on June 5th, 2019, as well as our earnings release posted a few minutes ago on our website. Copies of these documents may be obtained from the SEC or by visiting the investor relations section of our website.
Please note that unless otherwise specifically referenced, all financial measures we use on this call today are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in the investor relations section of the website and in our earnings press release. Nutanix management will be at the Deutsche Bank 2019 Technology Conference on Tuesday, September 10th in Las Vegas. We hope to see many of you there. With that, I'll turn the call over to Dheeraj. Dheeraj?
Thank you, Tonya. Good afternoon, everyone. Q4 was a good quarter for us as we beat street expectations on total billings and revenue and by $15 million each for software and support billings and revenue. Going forward, we'll be guiding on software and support billings and revenue or total contract value, TCV, as we call it. For Q1 billings and revenue, even as our business top line has been impacted by the subscription transition. More on this later from Duston. For the past two quarters, we've highlighted how we needed to rebuild our pipeline as we continue to transform our business to subscription. I'm pleased to report that our Q4 results demonstrated measurable progress in our subscription transformation. Our pipeline funnel, our sales re-enablement, our simpler messaging on platform versus new apps, and our hybrid cloud journey.
All this has enabled us to close our fiscal 2019 on a high note. While we still have much work left in our business transition towards a hybrid cloud model of licensing, we're encouraged by our progress to date and believe that our solid quarter-over-quarter billings and revenue growth, as well as our progress in sales hiring, are clear indicators that our execution is improving and our market remains strong. We're particularly pleased to see such strong growth in our deferred revenue balances in Q4, with 44% year-over-year growth. Our remaining performance obligations or RPOs will remain a strong proxy of the underlying health of our business, especially as our life of device licenses transition to term-based licenses. Our subscription transition continues to move along at a rapid pace.
Just like our hardware to software transition in fiscal 2018, we are shedding significant top line for our future-proof business architecture that will position us well in the era of cloud. Our sellers and customers have responded well to the model change, and we believe that subscription and infrastructure software business, both on-prem and off-prem, will quickly become a core competitive advantage for the company. Our customers will be able to buy portable software licenses that can run both in a private cloud and on bare metal offerings in the public cloud. We make a strong push for why hyperconvergence matters even more in the public cloud virtual networks and why data and applications need to be close together, preferably on the same machines and physically within the same racks.
Just like this last decade, the sheer amount of data will make the network an even bigger enemy of applications. It's these laws of physics that make HCI such a powerful architecture, even for hyperscaler data centers. The flexibility of portable licensing will enable our customers to treat their private infrastructure as availability zones, or AZs, that are peers of the availability zones, or AZs, in the public cloud. More importantly, they'll be able to move applications freely and redeploy Nutanix licenses back and forth, thus creating a true hybrid cloud. With a virtual private cloud, or VPCs, as public cloud developers call them, experience on both sides. Renting software won't be the domain of public cloud alone, as proved by the business model transitions of many large software companies this last decade.
Customer success will be king, as we have hustle like SaaS companies to work on customer retention and churn, annual contract values, or ACV, net expansion rates, and lifetime value. These metrics will be the new vocabulary of Nutanix once we have moved the majority of our life of device entitlements. This is the why of our subscription transition. This is the why of our own digital transformation from appliances to OEMs to software to subscription, and eventually to ratable, as you'll hear from Duston. This is the why of digital journeys within our customers as they grapple with the trade-offs in technology of ownership versus access. Our digital transformation continues to be ahead of our expectations with subscription revenue up 16% from Q3, and now representing 71% of total billings. Strong progress towards our previously stated goal of 75% by the end of calendar 2021.
Reflecting on Q4 and more broadly on FY 2019, as our platform continues to make inroads into a hardware-centric world of on-prem infrastructure, we've made meaningful progress with our new apps, i.e. Essentials and Enterprise, that run on top of our core platform. We now see these new apps in 26% of our deals in the rolling four-quarter basis, up nicely from 23% last quarter and 17% in Q4 of FY 2018. This quarter also saw the addition of approximately 919 new customers, our highest new customer infusion in the past six quarters. These new customers included 31 new Global 2000 logos, bringing our new total number to 810. In Q4, we continued to see strong large deal momentum with 58 deals worth more than $1 million, 11 of which spent more than $1 million with us in Q3.
Of those 58 deals, 26 were with customers in the Global 2000, and three were worth more than $5 million. We now have 16 customers that spent over $20 million with us in lifetime bookings, up from nine customers at the end of FY 2018. Of those 16, six were over $30 million in lifetime bookings. We have 46 customers with over $10 million in lifetime bookings, up from 26 at the end of fiscal 2018. More importantly, these metrics continue to show robust growth, even though it's apples to oranges between the older TCV deal values and the newer term-based deal values. Our broader product portfolio drove large opportunities with new and existing customers. A great example of this was a deal worth more than $10 million in Q4 alone with a Global 500 holding company for insurance, reinsurance, and investment operations.
This customer was looking to adopt a hybrid cloud strategy and gain a price and performance advantage over its existing legacy infrastructure. After seeing both the simplicity of our Enterprise Cloud platform and the value we bring to a total hybrid cloud solution through database and automation offerings such as Era and Calm, this customer decided to reset its entire data center strategy using our technology. Additionally, across our customer base, Files, Flow, and Prism Pro are becoming strong additions to our portfolio. On the theme of deepening our penetration within G2K, the question of why Nutanix would come up to a casual observer. If you look closer at the JPMorgan Chase 2019 CIO survey, you would know why we are gradually becoming a trusted invisible infrastructure brand within the largest enterprises going through their own digital journey. The words frictionless, reliable, and invisible are synonymous with Nutanix.
We don't sell vaporware. Speaking of which, I specifically want to emphasize a Q4 deal with a total contract value of TCV of over $15 million this quarter, and how a Fortune 25 customer selected our platform as the backbone powering its infrastructure across the U.S. This customer, with a lifetime spend of nearly $30 million since their first purchase 18 months ago, selected our core platform with AHV Virtualization over an incumbent that had overpromised and underdelivered on true enterprise reliability with software-defined infrastructure. Last quarter, we told you about a win with a new customer, one of the global four accounting firms, that was worth nearly $6 million. In Q4, our team worked closely with this customer to understand their unique challenges replatforming their infrastructure for the hybrid cloud.
In a trend we are seeing throughout our business, one of our essential offerings, Calm, is allowing us to learn with our customers in the real meaning of hybrid cloud. This customer shared with us that with their legacy approach, it would take them years to realize their multi-cloud vision. Calm, together with our core, was the critical combination that made this win possible. We are particularly pleased with our strong uptick in gross margins, which grew to 80% this quarter, even as we carve out more bookings in the deferred revenue that goes to our balance sheet. Most importantly, our support and customer success organizations continue to differentiate our solution from the competition by being authentic in their approach to problem-solving. Speaking of apps versus the platform, our database-as-a-service offering, Era, helped us win new opportunity with a major American airline in the Global 2000.
In a deal worth more than $3 million, this existing customer that has a lifetime spend of more than $10 million decided to replace its proprietary, heavily engineered database system for e-commerce with Era, backed by our web-scale core running on commodity servers. In another win this quarter worth more than $1 million with a Global 2000 multinational healthcare company, we were able to expand our existing presence because of our rich product portfolio in data services, automation, and security. Speaking of security, our federal government business is top of mind for us as we build our hybrid cloud offerings. Earlier this month, the Nutanix Xi Government Cloud was listed in the FedRAMP marketplace as FedRAMP in process. FedRAMP is a government-wide program that enables federal agencies to rapidly adopt cloud-based IT solutions that meet stringent standardized security criteria.
Federal agencies are already taking advantage of some of the services in the Xi Government Cloud as part of the civilian entities. This is a significant step towards a full FedRAMP moderate authorization, which will enable federal agencies to take advantage of our Xi Government Cloud solutions. At our Investor Day in March, we spoke about our need to invest and focus on pipeline as we hire hundreds of sellers every year. We are particularly pleased to see strong pipeline creation in our enterprise segment, yielding a surge in new opportunity for workload expansion in existing accounts and new Global 2000 prospects. For the first five years, that is our first $1 billion, we're mostly selling to the commercial mid-market and large federal agencies. In the last three years, with an intense go-to-market focus, segmentation of the sales force, and expansion of the product portfolio, we built a world-class enterprise-focused company.
In the next three years, we have to prove that we can balance the two ends of the barbell equally well, selling both within the Enterprise and to the commercial mid-market at scale. With that in mind, we have segmented commercial completely out of our Enterprise sales leaders and building a focused U.S. commercial sales leadership and an organization under them. We are also emphasizing higher digital touch at the top of the funnel so prospects can go without any human touch from digital ads to our clusters in the cloud with a few clicks. Before I conclude, I would like to take a minute to reflect on the highlights of our past fiscal year. Fiscal 2019 represented a new phase of development for this company as we leaned into our hybrid cloud vision and expanded beyond our core infrastructure platform.
I'm pleased that Xi Cloud Services are generally available to the public, they have helped create significant opportunities for us in both new and existing accounts. This year also saw our multi-cloud, multi-stack approach validated by the market with new partnerships with HPE and others, delivering customers more freedom to choose the hardware platforms that best fit their environment. We also grew our customer base 34% year-over-year with new logo additions. This year, we made tremendous progress in our subscription transition, having made a painful yet fundamental change in pricing for our new software and services model to market scale. We grew our subscription billings 57% in fiscal 2019 to fiscal 2018, while our gross margins increased from 68% in fiscal 2018 to 78% in fiscal 2019.
This last year, as we were adding new employees at a brisk pace, we also codified our invisible cultural principles in how we maintain high standards of ownership, curiosity, and listening. We also featured in the Forbes JUST 100 list of the 100 companies that are doing right by America. We're pleased to end the fiscal year on a resilient note as we plow through one of the toughest transitions in the history of IT, going from hardware to software subscription. I'm proud of the hard work and commitment demonstrated by our team members around the world. As we move into the new fiscal year, we'll continue to work through the business model transition. Foremost among them is educating our hardware-centric ecosystem about the new subscription economy, annual contract values, and bite-size selling.
Case in point is the way the channel is reporting our numbers to Wall Street analysts, not realizing that we're not selling hardware anymore, nor the impact of a subscription transition. This burden of proof and education lies in us, as we are one of the first infrastructure companies to disrupt the hardware neighborhood with pure software, portable licenses, and consumption economics. Subscription's biggest value will be in complete segmentation of field activities. That is, sales hunting for new ACV versus customer success farming for the residual as PCV, and the two teams maximizing customer lifetime value or LTV in tandem. That focus and clarity of purpose in the coming 18 to 24 months is how we'll unlock the biggest efficiency gains in our go-to-market. I look forward to continuing to build momentum in the new fiscal year.
As we completed our hardware-to-software transition this last quarter, it is a seminal moment for the company to start guiding the software and support billings and revenue. We hope our investors find this to be a simpler way to model our business going forward. Speaking of simplicity, there's one more thing. We're going to start giving out annual guidance. While the subscription transition makes it harder to project the full year, Duston will introduce the tradition of annual guidance because we believe we can tell a simpler, more compelling story of our two aspirational areas of investment, our commercial business and our new apps, and how they unfold over the coming year and the future. Talk more about this quarter and the fiscal year, and now turn it over to Duston. Duston?
Thank you, Dheeraj. I was pleased to see our fiscal year close out with a stronger Q4 performance versus the performance of the prior few quarters. The business is starting to show some results of improved execution, with good momentum in bookings, new customer growth, large deals, and Global 2000 traction. Additionally, as Dheeraj just noted, the shift to a recurring subscription business exceeded our expectations during the quarter, and we continue to expand our pipeline. In Q4, subscription billings accounted for 71% of total billings, up from 65% in Q3. Subscription revenue now accounts for 65% of total revenue, up from 59% in Q3. The faster than expected transition in Q4 was buoyed by some larger deals in the quarter. In Q4, our new term-based subscription bookings increased 67% to $150 million, up from $90 million in the prior quarter.
We expect these subscription percentage to fluctuate a bit ± for the next couple quarters. We are very pleased with the speed that we're working through our subscription transition, and as more of our business moves to subscription, it gives us more data to review for trends. This allows us to gain incremental insight relative to the top-line impact relating to the transition. During our Q4, we saw additional total contract value imbalances between our five-year term deals and life-of-device license deals, which resulted in less total contract value received on these five-year term deals versus what would have been realized on an equivalent life-of-device transaction. To adjust for this, we're altering our pricing structure this quarter on five-year deals to try to correct this imbalance. However, we've assumed that this value differential will continue for the foreseeable future.
We also saw the average duration of our new subscription contracts fall to 3.7 years in Q4 versus a duration of approximately 3.9 years last quarter. This was a result of seeing more five-year deals move to three-year terms rather than an acceleration in one-year deals. This contract duration shift results in less upfront billings for the initial deal, with the difference being captured when the term renews. As a result of these trends, we're now planning for a negative top-line impact relating to the subscription transition to be approximately 20% versus the prior assumption of 10%. As we stated in the past, we do not believe that any of the prior transitions to subscription in our industry have been quite as complicated as the one that we are now working through, which includes two very different pricing mechanisms between the prior life-of-device licenses and the new term-based licenses.
Despite this negative subscription impact to the top line, in Q4, our bookings performance rebounded quite well as we exited Q4 with over 2.5 times more backlog than the prior quarter. I'll move on to some specific Q4 highlights, but before I go into the specific details for the quarter, when analyzing the absolute numbers in growth rates, please keep in mind that we believe the total billings and total revenue, as well as the software and support billings and software and support revenue performance for the quarter, were all compressed by between $20 million-$25 million due to our subscription transition. Total billings and revenue performance was also impacted by $8 million as we shipped less hardware than planned.
Revenue for the fourth quarter was within our guidance range of $280 million-$310 million, coming in at $300 million, down 1% from the year-ago and up 4% from the prior quarter. Hardware accounted for 4% of total revenue, down from 8% in the prior quarter. Software and support revenue was $287 million in Q4, up 7% from the year-ago quarter and up 8% from the prior quarter. Total billings were $372 million in the quarter, within our guided range of $350 million-$380 million, representing a 6% decrease from the year-ago quarter and a 7% increase from Q3. Software and support billings were $359 million, flat from the year-ago quarter and up 11% from the prior quarter. Our bill to revenue ratio in Q4 was 1.24, up from 1.2 last quarter.
New customer bookings represented 26% of total bookings in the quarter, down from 31% in Q4 2018 and up from 25% in Q3. In Q4, our software and support bookings from our international regions represented 45% of total bookings, versus 40% in Q4 2018. Our non-GAAP gross margin in Q4 rose nicely to 80%, three percentage points better than our guidance of 77%. Operating expenses were $344 million, and our non-GAAP net loss was $106 million for the quarter, or a loss of $0.57 per share. A few balance sheet highlights. We closed the quarter with cash and short-term investments of $909 million. That's down $32 million from Q3. We used $10 million of cash flow from operations in Q4, which was positively impacted by $12 million of ESPP inflow. Free cash flow for the quarter was negative $33 million.
This performance was also positively impacted by the $12 million of ESPP inflow in the quarter. Turning to the details of our Q1 guidance. Hardware has become an insignificant percentage of our total billings and revenue, and therefore, going forward, rather than providing guidance for total billings and total revenue, we will only specifically guide to software and support billings and software and support revenue. We will also provide an estimate of hardware as a percentage of total billings.
On a non-GAAP basis for Q1, we expect software and support billings to be between $360 million and $370 million, software and support revenue to be between $290 million and $300 million, hardware billings and hardware revenue to be 3% or less of total billings, gross margin of approximately 80%, operating expenses between $385 million and $390 million, and a per-share loss of approximately $0.75 using a weighted average shares outstanding of approximately 190 million. The guidance for Q1 assumes the following: An estimated 20%, or $25 million to $30 million top-line compression related to our subscription transition, approximately $10 million less in hardware billings and revenue versus current Street estimates, and a bill to revenue ratio of 1.23 versus current Street estimates of 1.20, impacting total revenue and software and support revenue by approximately $10 million.
The 20% top-line compression related to the subscription transition impacts the Q1 year-over-year growth rates by approximately seven percentage points. The software and support billings guidance of $360 million-$370 million compares to the current Street estimates of $355 million. The software and support revenue guidance of $290 million-$300 million compares to the current Street estimates of $290 million. Our planned increase of $40 million-$45 million operating expenses in Q1 is primarily coming from the following expense categories: Planned increases in headcount, particularly in sales and engineering, and regular course and merit increases that are effective Q1, cost associated with our annual global sales training and enablement meeting, and continued growth in our demand generation spending to fuel our planned growth for FY 2020, including our annual EMEA .NEXT conference in Copenhagen, which was moved up from Q2 last year to Q1 in fiscal 2020.
Turning to the details of our fiscal 2020 guidance. This is the first time that we have provided annual guidance. Our subscription transition has clearly added complexity to the business, which has made it tougher for the investment community to model. We hope that this top-level view of FY 2020 will help provide some clarity on our expectations for the year. For fiscal 2020, we expect software and support billings between $1.65 billion and $1.75 billion, software and support revenue between $1.3 billion and $1.4 billion, hardware billings and hardware revenue to be 2% or less of billings, gross margin of approximately 80%, and operating expenses between $1.65 billion and $1.7 billion. This guidance for fiscal 2020 assumes no major economic downturn during the fiscal year and no material change to the current average subscription term of 3.7 years.
This guidance also assumes an estimated 20%, or approximately $170 million-$200 million, top-line compression related to our subscription transition, as well as approximately $45 million less in hardware billings and hardware revenue versus the current Street estimates. The estimated 20% top-line compression related to the subscription transition impacts the fiscal 2020 year-over-year growth rates by about eight percentage points. The software and support billings guidance of $1.65 billion-$1.75 billion compares to the current Street estimates of $1.6 billion and reflects a year-over-year growth rate of 17%-24%. The software and support revenue guidance of $1.3 billion-$1.4 billion compares to the current Street estimates of $1.3 billion and reflects a year-over-year growth rate of between 15% and 24%. We will continue to push through our transition to subscription as quickly as practical.
We have targeted our subscription-based billings to be greater than 75% by the end of FY 2020. We are also aware that as our business increasingly transitions to subscription, our go-to-market cost structure must also transition to a more efficient model that resembles the efficiencies of other subscription or SaaS models. Although this will take some time to accomplish, some of the early thinking and work has already begun. We remain bullish on several of our newer products as they are starting to become a bigger deciding factor in winning large enterprise-type deals. Therefore, we will continue to significantly fund these newer subscription-based products throughout FY 2020. We believe these newer product offerings will ultimately enhance our top-line growth and protect our value proposition in the years to come. FY 2020 will also be a year that we have a renewed focus on investing in growing our commercial business.
Our enterprise business is showing good signs of strength from the investments in FY 2019, and we expect an improved commercial performance in FY 2020. Our expectations for FY 2020 clearly reflects the impact of the subscription transition, as well as the continued funding of newer products in our solution set. These two factors alone account for well over 50% of the projected negative operating margin in FY 2020. In this transitory year, we would expect cash usage in the low to mid-$200 million range versus the current Street estimate of $190 million, with the subscription transition accounting for a vast majority of this cash usage. Lastly, if the estimated growth rates for FY 2020 do not materialize as planned, we will prudently manage operating expenses accordingly.
In summary, we continue the tough work of transforming the business model with a view on the long term despite the short-term impact to the business. It's been nearly two years since we started the transition from an all hardware model to an all software model. It was this transformation that laid the foundation for our current transition from an all software model to an all subscription model. It will be the all subscription model that will ultimately lay the foundation to our third and final phase of transforming the company, with the final phase being the all ratable model. Once again, despite the significant short-term optical impacts to the business, we are already planning how we might make this next and final phase, the all ratable phase, a reality at some point in the future.
With that, operator, if you could now open a call up for questions, that'd be great. Thank you.
Thank you. If you would like to ask a question, please press star followed by the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Jason Ader from William Blair. Your line is open.
Yeah, thanks. Dustin, I think you mentioned 2.5x on the backlog versus the prior quarter. Can you just talk about, I guess, what drove that specifically?
Well, I think it was good execution. Obviously, in the field. We knew that was going to rebound eventually after two quarters that we weren't very proud of. We ended up with some good backlog build in the quarter. We'll see how this quarter goes, but we would hope to do the same thing, but we'll see how it goes.
Okay, Dheeraj, just for you. When we think about the kind of hybrid cloud pitch from Nutanix, and let's just say I'm a company that's got an on-prem infrastructure that's, say, transitioning to HCI, and I've also got a public cloud strategy, and I'm working with, let's just say, Azure to move apps over time from my private cloud, which is based on HCI, to public cloud, which is obviously a different architecture today. Is the pitch that stay with Azure, but just move to the bare metal Nutanix offering on whichever public cloud and just kind of keep everything consistent? Is that ultimately what you're trying to convince customers to do?
Yeah, thanks for the question, Jason. There's two parts to this. One is there's the data plane, the control plane, and then the management plane. There's three layers of the stack here. Customers really like our data plane because it's reliable, highly available. When I say data plane, I don't just mean software-defined storage, I mean filers and object storage, and even our segmentation, micro-segmentation kind of network products. At the end of the day, when they want to take this to Azure, in fact, we're already talking to some of our largest customers to be able to take Nutanix to Azure. They want to use Azure's billing plane and identity and data centers and things like that.
There will be a certain blurring of the lines between what they want to use from Azure, which could be Azure credits, and how they can burn those credits by using a Nutanix-like technology. I think that's where the world is really headed for us.
Okay, thanks.
Your next question comes from Wamsi Mohan from Bank of America. Your line is open.
Yes, thank you. Thanks for sharing the fiscal year guide. I was curious about your confidence in putting this out there, given just that there is so much macro uncertainty. You've seen some very material misses in storage and server land, and just curious if you're baking in a tougher macro backdrop in your guide, versus sort of the last couple of quarters when you thought most of this was execution-related. I have a follow-up.
Yeah. Thanks, Wamsi. Good question. I'm going to take a stab at it, and Duston, you should too. There's basically two macros. One is the macro macro, and one is our own subscription macro. Right now, we are very much focused on that one macro that we can at least get a little better handle on. We think that if we can keep that in control, as Duston mentioned, about 3.7 year term, modulo that, I think we believe that we have things in our control, and we are obviously investing towards growth as well. At the same time, if the macro really changes, then overall our investments in sales and marketing will also reduce, and we'll adjust accordingly.
Yeah. Since we last updated you on our thoughts there's really been no additional signs or signals that we've seen. Who knows what the future brings? Over the last three months, in our view anyway. Again, at $1 billion and five, we don't have this massive view of the world here. From our perspective, there's really no change from our view three months ago.
Okay. Thanks for that. Dheeraj, you say you need to balance the large enterprise focus versus U.S. commercial sales segmentation. Why is this the right time to re-segment the sales force? Where do you think the incremental investments that you're going to make over the next year, where will those be most geared towards? Thank you.
Yeah. I think the question of right timing, we have a much better grasp of the segmented enterprise sales force. We've been doing it for the last two and a half years now. If you recall our February 2017 call, we talked about segmentation. We did that for almost two years. I think we have a pretty good grasp on it. Now our sales leadership actually believes that we can now focus on commercial. There is a better marketing engine for commercial. We think that we have a better brand as well that can seep from the enterprise down to commercial.
The digital delivery model is now coming together where, as I mentioned, banner ads, with a couple of clicks, you can actually get to doing a POC and kick the tires on Nutanix without having to really ship a box and do all sorts of things that appliance companies used to do. I think we'd love to do more and more digital touch with our prospects before they even pick up the phone and call a human being in the sales force.
That's all good.
Your next question comes from Jack Andrews from Needham. Your line is open.
Hello. Good afternoon. Thanks for taking my question. I was wondering if you could drill down a little bit more on the commentary around 26% of deals including a product outside your core offering. You talked about some of these newer products becoming a deciding factor in winning larger deals. Could you provide a little bit more color on any one of them in particular that's really helping you move the needle on this front?
Obviously, we understand data really well. Files has taken off in a big way. We're going after application data now and Files to me, the system of record. With capacity, we'll actually see that one product actually make a lot of progress in terms of dollars that we make on Files. Flow is a little bit more of a control plane, so we wouldn't see the exact same kind of dollars. The fact that Flow is pulling AHV, you think about when people really like micro-segmentation, extremely lightweight, easy to use, they start pulling our hypervisor as well, even though our hypervisor is license-free. On the systems of engagement and intelligence, think about Era and Calm. They've done a pretty good job of really having more of a solution sell approach.
Era is more for database workloads, we're going and talking a language to the database folks and including to the DevOps outside the West Coast about how they should manage databases. That pulls the core as well along with it. As we start thinking about the workflows, we're not thinking about infrastructure workflows or virtualization workflows, we're thinking about database workflows. Similarly, Calm is now the system of engagement that we think we can integrate with Beam and Epoch to make it a system of intelligence as well, which is basically multi-cloud workflows. How do you really think about the private cloud, both a Nutanix stack as well as a VMware stack, and how do you think about Amazon and Azure? Then how do you start to drag and drop these applications between different clouds?
I think the future of multi-cloud will depend on how easy do we make mobility, the idea of motion of applications across different clouds. I think between Calm, Era, Files, and Flow, we're making tremendous progress. There's another system of intelligence called Prism Pro, which we are going and upselling to our customers around operations management. That's about monitoring, alerting, doing a lot of machine learning around our machines, and making sure that our support actually doesn't have as painful an experience when it comes to debugging customers' problems.
Great. Well, really appreciate the commentary around that. As a follow-up question, Dheeraj, you talked about how you've been disrupting the channel market which is historically a hardware-centric market. I was just wondering if you could expand a little bit more on your thoughts there. As you think about trying to gain a broader presence with channel partners, do you think it's better to maybe go deep with a smaller number of relationships who really understand your products? Do you think you can gain enough significance and market presence with a larger number of vendors who may be selling dollar volumes of competing products essentially?
No, I think less is more with any relationship, and we've done a good job with a few, and we believe that at least in the U.S., we have a good handle on this. Obviously, internationally, there is a lot of fulfillment that channel actually does beyond just lead generation. At the end of the day, we are lucky if we actually get a few of them to really go deep, and that's where the focus has really been. Sometimes the customers bring their preference. They're like, "I would like to do business with this channel partner," and we basically work with the customer's interest there. Mostly we work with a few partners and try to give them more business as the quid pro quo from them translates to us, too.
Great. Thanks for taking my questions.
Your next question comes from Rod Hall from Goldman Sachs. Your line is open.
Yeah. Hi, guys. Thanks for the question. I wanted to start off, I guess, and ask about the margin trajectory here. If you back out the hardware passthrough and you just look at the software margins in the quarter and the support margins, the software margins seem to dip quite a bit, then the support margins are up a lot. I'm assuming maybe that is related to the success you've had with the contract sales. I just wanted to check that, Duston, and see if you can bridge that for us at all so we understand those dynamics and those underlying margins. I've got a follow-up.
It's a little more confusing than that. Internally, we look at it in its entirety just because of the way some things work here. In Q4, we actually had a year-to-date adjustment. There was no impact to total margins, but a year-to-date adjustment that flowed through in Q4, COGS coming out of support, and going into product. I think if you do the calc there, it's probably a 4.5% or so pickup to the support margins and probably about a 2.5% decline in the product margins from that makeup. That was kind of a change for the entire year there. Do some of our cloud-based offerings, and it's probably the COGS are more appropriate into the product category there. Again, we kind of look at that in its entirety anyway from a margin perspective. Hopefully, that gives you some clarity there.
Are you saying that that's just a one-off that doesn't carry forward as we look into next year, really? It just affects that Q4?
Yeah. Those COGS, on a quarterly basis now, will go up into product and out of support. There'll be a little ongoing shift there. Again, there's no impact to the total.
The shift is what you loaded in there is the whole year loaded into one quarter, so the impact going forward won't be quite as big as what we see there in the.
Yeah. Correct.
Okay. The other question that I had for you guys is on the just looking at the full-year guide and the rule of 40, obviously we calculate a pretty low number there. I just wondered how you're thinking about the rule of 40 now in the context of all this.
Yeah. This is a transition. You see the growth rates from the guidance perspective and the impact that we see on the subscription piece.
Once we actually get to ACV, right? I mean, right now we can't do that because it's pro forma.
Yeah. There's a lot of complexities in here. We've got work to do on that, and it's going to be a while, obviously, before we get back to that. Say this transition, you've got some apples and oranges going on from a comparative perspective, too.
It's still a governing kind of principle the way that you guys are running the business, or is it sort of something that you're tabling for now and maybe revisit in 2021, or how are you thinking about that?
Yeah. I mean, it's hard to, in a transition year like this that's so impactful, it's kind of hard to govern that. Obviously, we'd like to get the cash back into a neutral position here as soon as we can, and the growth rates accelerated, and I think ultimately the rest takes care of itself here, but we'll need to flush through a few things.
Okay. All right. Thank you guys.
Your next question comes from Aaron Rakers from Wells Fargo. Your line is open.
Thanks for taking the questions. I have two as well if I can. On the first question, I just want to understand, kind of just a clarification, if you will. The 2.5x increase in what you're calling backlog, is backlog Remaining Performance Obligations or contracted obligations that you sit on top of the deferred balance, or are you referring to pipeline? I want to be clear because that seems like just a massive number considering that I think your contracted value was like $845 million actually last quarter. Can you just give us exactly the context behind that 2.5x increase?
It's simply an order that we have not billed.
Okay. Is that what would be disclosed as contracted, not yet revenue-recognized balance?
No. Yeah.
I think you're probably looking at two numbers, deferred revenue, which obviously is long-term.
Right.
Then there's a very short-term stuff, which is for the next quarter. It's just deferred billings, actually.
Yeah. I mean, we got the order in from the customer, but it simply hasn't been billed.
Okay. Maybe a different way of asking then. I think, Dheeraj, at the beginning, you said the remaining performance obligations would be an important metric to consider as far as your business trajectory going forward. That is something that's actually disclosed in the 10-Qs, I believe. That number is actually something well north of deferred revenue, correct?
Yeah. I'm getting confused on your question here. Again, this backlog that we're referring to, again, is orders that have come in, might have been at the end of the quarter, whenever, that we simply haven't billed the customer or done anything with that order.
The deferred revenue.
Okay
is $910 million.
Yeah, $910 for the quarter, yeah.
Okay. Fair enough. Thank you.
Yeah, we'll disclose it the same stuff we've always done, in this case, the Q, but in this case now, the K here.
Okay. I guess, thinking about the model and the operating expense trajectory, the guidance was quite a bit higher than what I think the Street was looking for. Can you just help us understand how you think about kind of the path to profitability, or what kind of level of break-even you think about from a modeling perspective?
Yeah, we've got some work to do on that, again, through this transition time here. We've got some investments. I think ultimately you have to believe that these investments will pay off in the future for higher growth rates. I think we've started to see that. I think, if you look at the new products, I wouldn't expect us to disclose this every quarter, but I think if you just look at new products that we define as Essentials and Enterprise, and you look at it, you have to really cut it down to ACV, an annual contract value. In FY 2019, those new products represented about 10% of our total annual contract value in FY 2019. That should give you some feel that these products are getting traction. There's no bundling, by the way. These are kind of being sold by themselves.
At some point, we'll actually even start doing some thoughtful bundling on these products. It doesn't say, obviously, everything else they're dragging along with them. You've got to have a belief that what we're investing not only in the product side of the house, but the go-to-market side of the house, is going to pay off in the future.
Also, at Investor Day, we'll probably come back and talk about the three-year view as well.
Yeah. It's hard to do, obviously, on a call like this, but it's fair questions, but we'll give a clearly renewed view.
Okay. Thank you.
Your next question comes from Alex Kurtz from KeyBanc. Your line is open.
Thanks for taking a couple of questions here. Duston, when we look at the North America sales organization and what's been going on there the last couple of quarters, how would you characterize productivity across different cohorts? Any kind of metrics around how I know that you just gave out this backlog number as a signal of that, but is there anything else we can kind of dig into? Dheeraj, your largest competitor is obviously having a big event this week, and there's a lot of discussion around Kubernetes being integrated into their core compute product, and just some high-level thoughts about where Nutanix stands today on that topic.
Sure. Yeah. In fact, while Duston looks up that stuff for adjusted numbers of TCV, I'll take the question around Kubernetes and the rest. If you think about our strength, we are foundationally based on Linux, and the core container engine is really Linux-based, and that's our core competitive advantage. We are actually getting a lot of benefits because our hypervisor and our entire stack, including our controllers, are all Linux-based, actually. Now the real magic will come around this, how do you make it enterprise-grade, reliable, available, high-performance, and then encircle the compute engine, which is the Docker engine of Linux, with storage and networking and security and management planes and being able to drag and drop them across clouds. That's where the real monetization opportunity of Kubernetes really is.
We are coming from our strength because we are Linux-based, and VMware is coming from its strength, which is its install base, but they still have vSphere that is not Linux-based. I think we are more aligned with the cloud hypervisors. If you think about Amazon and if you look at what even Azure is doing now and what Google has, they're all based on Linux. We think we can get a lot of advantage of really taking Linux to everybody rather than having to build a proprietary code base around that. I think also competitively speaking, we have been a company that's really about data and design. That's how we lead with.
There's a lot of products that we built in the last four or five years that really bolster our data position around not just data for virtual machines, but data for containers, filer data, object storage that just came out recently, finally, database as a service. There's a lot of things that we're doing around data and making it really simple, which is around design, which is where we differentiate.
On your question, Alex, on North America, it's still early. I think Chris and team have made some really good progress in a very short period of time. I think we always look, again, on productivity at a ramped rep basis on a rolling 2 quarters. Clearly, that productivity in North America, we always take Fed out because it's so lumpy.
Yeah.
From Chris's territory without Fed, improved on a rolling two quarters. Lots of good things happening there, and Chris has taken a disciplined approach, obviously, to running the business. Lots of good stuff happening there, but it's early. We're particularly proud of what's happening in APAC. I think the team there has done a really good job. Their productivity, again, on a rolling two-quarters basis on the ramped rep, have gone up three or four quarters in a row here now. They're on a pretty good run, what they're doing there, and we're happy to have Sammy take over the leadership in EMEA. I think we've got three great leaders here now that will perform in harmony here. I think the execution will continue to improve.
Q1's always a tougher quarter in general, but we're excited to have some good focus on all three of these regions.
All right. Thanks, guys.
Your next question comes from Katy Huberty from Morgan Stanley. Your line is open.
Thank you. Good afternoon. Just looking at slide 15, you show lifetime bookings multiples, which have moved up and to the right over the past three years. In 4Q, that metric leveled off. Does that tie to the subscription transition, or is there another explanation for the expansion of that multiple slowing?
Well, top-line compression, obviously 20% doesn't help that multiple. We'd have to get back to you on the exact specifics. Are you talking about Global 2000 repeat multiple?
Yeah. On slide 15, the lifetime bookings multiples that you provide. I mean, if you look the past three years, every quarter they've increased. There was a leveling out. I mean, even last quarter, there was a big jump in the multiple, even with the weaker revenue trend. We can talk about it offline.
Yeah. Clearly, taking $20 or $25 million out of the top line. We'll get you a specific answer.
Okay. Dheeraj, earlier in response to a question, you talked about some of the apps that are driving engagement and revenue. It sounds like Files and Nutanix Prism Pro are contributing the most revenue now. Is that correct? When you think to fiscal 2020, are there new apps that you think can hit an inflection point in terms of revenue contribution?
Yeah, you're right. I think Files and Prism Pro are two. We are thinking about a top-down pricing model change for both Era and Frame around per desktop, per user, per year kind of a license, which will basically pull through the core rather than us pricing core differently from Frame itself. Similarly for Era, it could be based on sockets as well. There's some pricing simplification that will actually help us have that solution-based approach, which will help these two products not have two separate discussions. One is, "Well, I sold you the core, now I'm going to sell you from control planes or management planes." I think those are the kinds of discussions we're having. I think Era and Calm and Frame are the three that we believe could really take off from here.
That's great. Thank you.
Your next question comes from Mark Murphy from JP Morgan. Your line is open.
Hey, thank you. This is Pinakin for Mark. Thanks for taking my question. Duston, on the next year guidance, as we go into the 75% subscription revenue mix, do you perceive any risk in duration for the term-based licenses contract a little bit, but is there any specific incentives that's being given to sales reps to drive a three, four-year deal? Or in terms of flexibility, I mean, could it go towards that one-year level next year? I mean, you will probably not go to one year, but is there more risk in that number?
Well, one of the things that we are still trying to learn from market is how infrastructure is still considered CapEx for a lot of our customers, especially in the large enterprise. Until commercial becomes really large for us, I would assume that infrastructure will still be consumed in a three- to four-year kind of horizon, simply because a lot of CFOs still look at it as CapEx, actually. There's some sort of understanding of how the market perceives infrastructure to be, because our competitors are still selling hardware. That's going to be one of the balancing acts that we'll actually have to play with. Now, if the market wants to do one-year terms, we will not come in the way. We should not display anything unnatural to say, like, "Don't sell one year." I mean, definitely we want to do three-year contracts.
The question is how do we collect and how do we actually compensate for it?
I see. Understood. Okay. Secondly, on the sales new group that you talked about on the Enterprise side, do you perceive any kind of disruption around that? Seems like it's in U.S., and if that is baked into the numbers that you gave us?
Yeah. I think in the last 12-18 months, we have done a lot of segmentation for the Enterprise anyway. A lot of the territories we're talking about in the commercial space is white space. Chris really believes that we can get the flywheel going if we were methodical with commercial and investments in commercial as well.
Okay, thank you.
Our last question comes from Karl Keirstead with Deutsche Bank. Your line is open.
Okay, great. Thanks. Two for Duston. Duston, on the operating cash flow, I just want to make sure I heard you correctly. I think you guided for fiscal 2020, -$200 million to -$250 million. I just want to confirm that that's correct. I wanted to ask you, as we look out into the following year, fiscal 2021, do you think you're on a trajectory to realistically get to operating cash flow neutral that year, or given the ratable transition and the weight on cash flows, that could be a stretch?
Well, let me clarify the first thing. That kind of cash range we gave for FY 2020 is free cash flow, not operating cash flow.
Okay.
Okay. It includes all CapEx in that number. Obviously, the operating cash flow would be a lot better than the number that we had mentioned. We'll work through this. I think, as we get a majority of the business transition to subscription, obviously the cash usage has to come down, and it will come down over time. Whether it gets neutral in fiscal 2021, again, it's kind of a yearly look that we'll give investors again at Investor Day and some other thoughts, I'm sure.
Again, about collections, whether we should collect 3-year upfront or not, these are all the questions that we're going through right now.
Okay, that makes sense. Then just my second and last question, Dustin, back to the question around the OpEx guide for fiscal 2020, and how you might start to moderate that. You mentioned that you are beginning efforts to make your sales structure more efficient. It sounded like those are actions different than the split between commercial and Enterprise that you just mentioned. Without getting into too much detail, I'm sure it'll come later, but just broad strokes, what is the vision to get your sales efficiency a little bit more aligned, and hence that OpEx number under a little bit more control? Just maybe high-level thoughts would be great.
Yeah, I think it's similar to other type subscription businesses. How do you take advantage of renewals, and how do those play into the equation? How do you get some efficiencies? How do you get the productivity? In theory, these renewals take on a little different feel and look from a simplicity perspective, and does that enhance productivity? There's a lot of things that we need to go look at. We realize we need to look at it. We understand that there's some efficiencies that are needed there. We're in the early stages, quite honestly. It will take some time, but we understand we need to do that, and we're thinking through it.
Yeah.
Okay.
The Investor Day would be a good place to talk about some of these things.
Got it. Okay. Thank you very much.
There's no further time for questions. I'll now turn the call back over to the presenters.
Thank you very much for joining us today. As we said earlier, we'd love to see some of you at the Deutsche Bank conference. We'll talk to you all soon. Thanks.
This concludes today's conference call. You may now disconnect.